Regulators take the lead in advancing client protection in financial services, we’ve heard. Providers “merely comply.”
If you are of the view that providers can, and should, take a leading role in client protection, then the results of a recent survey conducted by the Aspen Institute are discouraging. The survey, carried out on behalf of the Smart Campaign as part of its strategic planning, took a look at the three-legged stool of client protection—providers, regulators, and consumers—and asked which element was the most important. Of the financial inclusion stakeholders who were interviewed, only 24 percent said that provider-led initiatives were the most important element in client protection. By comparison, 39 percent thought regulation and governance were the most important, and 37 percent put their faith in consumer awareness and activism.
I disagree! We believe action from the financial services providers themselves is a vital missing link. But what is holding them back? In a consultative process carried out by the Financial Inclusion 2020 project over the past year, here are the top six reasons we heard for providers not taking the lead in consumer protection.
- Providers don’t trust regulators. The relationship between financial institutions and regulators has been called “unproductive,” and at many points in our expert consultations we heard a plea for more dialogue between the two groups. Part of the concern is lack of capacity among regulators, who, purportedly, often don’t understand how regulations affect the business. This issue goes beyond client protection, of course. A KPMG report submitted to the G20 in November 2014 last year argued strenuously for a moratorium on regulatory reforms—a cry from the private sector for more consistency in financial regulation that also expressed concern about the potential costs of reforms.
- Regulators don’t provide incentives. Financial institutions must balance dual demands: to be value-maximizing for shareholders, and to serve the public interest. The demand to be value-maximizing is clear and immediate, while serving the public interest does not have clear incentives.
- Providers focus on short-term profitability rather than long-term sustainability. The big barrier to advancing client protection is cost—or the perception of cost. There are strong arguments about the long-term benefits of customer loyalty and wellbeing, but many financial institutions are focused on their next quarterly earnings report.
- Client protection is seen as a competitive disadvantage. Providers fear that they will suffer a competitive disadvantage if their client protection practices are more stringent than others – for example, if they are more transparent about prices, more conservative in loan approvals, or slower in collections. Of course, that’s a good argument for regulators creating a level playing field. After all, if one provider in a market is transparent about pricing and lending practices and others in the market are not, consumers may reject the more transparent provider because they don’t have enough knowledge to compare them to the less transparent claims from the other providers.
- Culture change is hard. Providers frequently “talk the talk,” but too often the energy for consumer protection does not reside on the business side of the organization, but in the compliance area or with the corporate social responsibility or marketing arms. It is seen as the responsibility of one unit rather than integrated throughout the institution. A crisis will generate some interest around consumer protection, but the energy often fades after a while.
- Providers lack capacity. Just as with all aspects of the customer experience, consumer protection is not just a policy decision, but an operations and organizational development challenge covering a wide range of issues. The Smart Campaign not only promotes the seven Client Protection Principles, but it also reviews client protection policies, procedures, systems, and how well the staff carries them out as part of its certification program. In other words, the certification process itself is a way for providers to build internal capacity.
So, what can be done? To help build trust with providers, regulators need to build their own capacity on consumer protection and consult with the private sector to understand the impact on provider business models. Bangko Sentral ng Pilipinas (BSP) in the Philippines is a model both in terms of providing capacity-building trainings to help regulators understand new technologies and for its “test and learn” practices when developing new regulations. Additionally, regulators – and investors – should strengthen both incentives for consumer protection as well as sanctions for non-compliance.
To dismantle the premise that strong client protection practices create a competitive disadvantage, the business case for investing in consumer protection needs to be made more clearly to providers. Moreover, the available practical tools to operationalize client protection, like those of the Smart Campaign, need to be utilized to aid provider capacity.
Governing boards of financial institutions need to take on this issue and hold CEOs accountable for instilling a culture of consumer protection throughout every aspect of operations.To appropriately frame long-term sustainability and profitability, and instill incentives and capacity-building mechanisms, strong high-level leadership is key.
But back to that KPMG report. It challenges providers to start transforming the regulatory cat and mouse game:
Meanwhile, we call upon banks, in particular, to intensify their efforts to introduce cultural and behavioural change, so that regulators can more comfortably take a step back. We need to break out of the ultimately unproductive environment we find ourselves in; often regulators believe that they need to tackle everything because parts of the financial sector cannot be trusted to play their part in improving standards.
Can we address these provider concerns so that the financial sector can play their part? There’s a role for everyone—boards of directors, CEOs, operations experts, regulators, capacity builders, etc.—in freeing up the private sector to take on the role they can uniquely play in client protection.